David Gershon CEO of SuperDerivatives
David Gershon CEO of SuperDerivatives

Online FX Options

Transparency versus Liquidity - is there a winner? David Gershon discusses how greater transparency now means everyone can determine an option’s fair price in advance of trading.

First Published: e-Forex Magazine 19 / FOCUS / July, 2005

Transparency in the foreign exchange (FX) market started to arrive in 1973 when Reuters put spot prices on their information screens. Coincidentally, the Black-Scholes model for options pricing, which went on to form the basis for today's options markets, was published in the same year.Although Black-Scholes enabled many new players to trade options, it had several flaws, which was highlighted by the equity market crash of 1987. The result was many market professionals realized that the model fails to capture the real price of options and this led to the description of the ‘volatility smile’. This was a means to adjust Black-Scholes by using different market inputs (volatility) for different strikes.Offering exotic options From 1991, banks started to offer exotic options to clients. Originally, the Black-Scholes (Brownian motion) approach to pricing was used. It was soon clear that the model was even more inadequate for pricing exotics. This perhaps was one reason why the initial growth in...continued

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